G-7 Officials Recommend Vigilance on Hedge Funds

The world's major developed economies show solid growth, but foreign exchange fluctuations, the rising power of hedge funds and dwindling energy supplies are a concern, G-7 finance officials said Saturday.

The officials called for monitoring hedge funds worldwide and urged talks with the industry. They said energy efficiency and diversification, particularly renewable forms, remains an economic priority. And they reiterated concerns about volatility in foreign exchange markets.

"We are confident that the implications of these developments will be recognized by market participants and will be incorporated into their assessment of risks," according to the statement, which was released after the G-7 participants ended their two-day meeting.

The group's concerned but conciliatory approach toward hedge funds was expected.

"Given the strong growth of the hedge fund industry and the instruments they trade, we need to be vigilant," the statement said. It added that the group will talk with the private sector and hedge fund operators and would ask the Financial Stability Forum to update its 2000 report on hedge funds.

Germany has made dealing with hedge funds a priority for its European Union and G-8 presidencies this year given their rising influence over companies. Finance Minister Peer Steinbrueck has said the country wants G-7 nations and EU countries to try to pre-empt any risks that speculative hedge funds may pose to the global financial system.

Ahead of the meeting, talk had focused on European worries over the weaker yen that makes Japanese goods less expensive than those made in the EU. China's tight control of its currency and huge trade surpluses have also raised concerns in the West.

But International Monetary Fund Managing Director Rodrigo Rato said Saturday that Japanese authorities have stopped intervening in markets on behalf of the yen for the past several years "and that is a very good policy."

"Japan is moving out of long and difficult deflationary circumstances," Rato said at the G-7 meeting. "The best thing Japan can do for the global economy is to keep growing," he said.

The G-7 finance ministers and central bankers also lauded China's commitment to "rebalance growth."

When the G-7 formed, comprising Britain, Canada, France, Germany, Italy, Japan, and the United States, China was an insular, closed communist state. In the three decades since, however, China's growth has exploded as it embraces elements of capitalism.

China has amassed more than $1 trillion in foreign currency reserves as it buys dollars to control the value of the yuan — a practice G-7 finance ministers have criticized in the past.